100 Baggers

Christopher W. Mayer · 2015

Thesis

The stocks that multiply a hundredfold share a small number of features, above all a high return on capital that the business can reinvest for many years, so the investor's task is to find such companies while they are small and then, hardest of all, to hold them through long periods and deep declines.

The main ideas

100-baggers, stocks that return 100 times the money invested, are rare but recur, and they share common traits.
Their returns come from twin engines: growth in earnings and a rise in the multiple the market pays for them.
The key feature is a high return on capital, earned repeatedly and reinvested over a long period.
Owner-operators with significant stakes in their companies outperform.
Buy right and hold on. The biggest challenge is not selling.
Most 100-baggers took decades to get there and fell by half or more along the way.

Buy right and hold on

Christopher Mayer's book updates an earlier one, Thomas Phelps's 100 to 1 in the Stock Market (1972), which studied stocks that multiplied a hundredfold between 1932 and 1971. Phelps's advice was summed up in a phrase Mayer adopts: buy right and hold on.

Mayer identified 365 stocks that returned 100 times their price between 1962 and 2014. The average time to reach that mark was about 26 years. The best performer was Berkshire Hathaway, which rose more than 18,000-fold from 1965.

The mechanism is compounding. A stock that compounds at about 20 percent a year multiplies a hundredfold in roughly 25 years. The returns come late, so an investor who sells after the first doubling or tripling captures only a small part of them.

Implication: the large returns in stocks come from a few companies held for decades, so build a portfolio around holding winners rather than trading them.

The twin engines

Mayer explains that 100-baggers usually benefit from two engines at once. The first is growth in earnings: the business becomes much larger and more profitable. The second is multiple expansion: the market comes to pay a higher price for each dollar of earnings, as the company's quality and growth become recognized.

The two tend to come together. A small, overlooked company with growing earnings is often priced cheaply; as it grows and attracts attention, the price investors are willing to pay rises as well. Sustained growth in revenue is a precondition, because earnings cannot grow for decades without it.

Implication: the best opportunities are growing businesses whose quality the market has not yet recognized, where both engines can still run.

Return on capital

The single most important trait, in Mayer's account, is a high return on capital earned repeatedly over a long period. A business that earns high returns on the money it invests, and can keep reinvesting its profits at those returns, compounds its value from within.

He connects this to how companies are run. Owner-operators, managers who own significant stakes in their businesses, have skin in the game and tend to allocate capital well. Chapters on the best chief executives, on share buybacks and on competitive moats extend the same theme: what matters is how well a company reinvests its earnings and protects its returns from competitors.

The mechanism is that a company's growth over decades is limited by how much it can reinvest and at what return. High and durable returns on reinvested capital produce compounding growth.

Implication: look for companies that earn high returns on capital, have room to reinvest, and are run by people who own a large share of them.

The coffee can

To hold through the long periods that 100-baggers require, Mayer borrows the idea of the coffee-can portfolio from the investment manager Robert Kirby, who described it in 1984. Kirby told of a client whose late husband had bought the stocks Kirby recommended but ignored his advice to sell, leaving the certificates untouched. The neglected holdings, including a few large winners, had outperformed the managed account.

The lesson is to buy good stocks and leave them alone for years, as if they were stored in a coffee can. Mayer argues that most investors sell their best stocks far too early, out of impatience or fear.

He also argues for concentrating on the best ideas, drawing on the Kelly formula from betting theory, and against holding dozens of stocks in what he calls Noah's ark portfolios.

Implication: once you own a company you believe in, set a rule that you will not sell for years except for a fundamental change, and keep your best ideas large.

Holding through declines

The hardest part of owning a 100-bagger, Mayer stresses, is staying with it. Nearly all of the stocks in his study fell by more than 50 percent at some point on the way to their hundredfold gains. An investor who sold in the declines, or who sold to lock in an early profit, missed most of the return.

Mayer concedes that there is no magic formula for finding these stocks in advance. The traits he identifies describe the winners, but many companies with the same traits never become 100-baggers.

Implication: expect any great long-term holding to suffer deep declines, and decide in advance that a falling price alone is not a reason to sell.

Limits

It studies only the winners. The 365 stocks were identified after the fact, so the traits they share may be common to many companies that failed, and the book does not measure how often its criteria pick losers.
100-baggers are extremely rare. Hendrik Bessembinder found in 2018 that most American stocks since 1926 returned less than Treasury bills over their lifetimes, and that just 4 percent of companies accounted for all of the stock market's net gains.
Concentrating on a few holdings and holding through deep declines raises the risk of large losses. The same patience that captures a 100-bagger keeps an investor in a company that never recovers.

Common Stocks and Uncommon Profits — the earlier case for finding outstanding growth companies and holding them almost forever.
One Up on Wall Street — another guide to finding stocks that multiply many times over.
The Essays of Warren Buffett — Berkshire Hathaway, the study's top performer, and the reasoning behind it.